by Mike Phipps - Mike Phipps Finance
03rd November, 2020
Finally, some good news for borrowers!
Those of you who follow this column (a sure indication of nothing better to do) may recall recent mention of the so-called Wagyu and Shiraz case.
For those who do have better things to do here is a quick snapshot from that article:
Following the banking royal commission living expense tests, which can have a significant impact on debt service capacity outcomes, have moved to a more individual level rather than a standard allowance as was previously the case. This has led to borrowers being compelled to detail living costs in great detail and lenders to trawl through bank statements in some bizarre attempt to establish the lifestyle costs of the punter. The premise being that borrowers have no capacity to adjust their lifestyles to meet their commitments. This whole laughable saga came to a head when ASIC had a crack at Westpac in respect of their responsible lending living expense testing.
I will leave you with what Justice Nye Perram had to say in his landmark, and entirely sensible, skewering of the ASIC case: “I may eat wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare,” wrote Justice Perram as he carved up the argument that a consumer's declared living expenses should be the key to assessing whether they could meet loan obligations.
“The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship.”
This whole sorry saga has come into sharp focus over the last month, but we’ll get to that. First, a bit of history....
In 2009, Commonwealth legislation was introduced under the title of the National Consumer Credit Protection Act (NCCPA). The legislation formed the basis of what has come to be known as responsible lending and formed the basis of a premise that borrowers needed to be protected from the supposed predatory conduct of banks and other lenders. Over time, various regulations and accepted industry standards led to the farce we see outlined in the excerpt above. That is, an assumption that lenders see great benefit in lending to parties who cannot repay debt and that consumers are so unsophisticated that they need government legislation and regulations to protect them from themselves.
Consumer protection groups and other vested interests hailed the progressive developments while others wondered at the intrusion of government in the guise of protection. And when I say protection... at last check the ASIC Responsible Lending Guide ran to almost 100 pages.
I do not know about you but I’m a bit tired of being protected, know what I mean?
Anyway, in September 2020 The Treasurer, Josh Frydenberg had a lightbulb moment. In a factsheet co-authored with the assistant treasurer Mr Frydenberg noted a growing disconnect between the good intentions of the regulations and legislation and the reality of the regulatory guidance over the past 10 years.
No sh*t Sherlock! Put in place an ever-growing mountain of lending compliance, punitive punishment for lenders who fail to comply, wholly unrealistic debt servicing standards and watch loan approval times blow out and flow of credit grind to a halt. Add a system that automatically takes the side of the consumer and it’s a recipe for disaster.
Anyway, the treasurer has seen the light.
To quote Deloitte in a recent on line summary: “The Treasurer has noted that the regulatory burden on lenders has resulted in higher costs and higher levels of conservatism in credit-decision making, which has resulted in consumers bearing the burden of higher obstacles to access credit”.
The plan is to simplify existing responsible lending laws with the existing laws to cease for almost all classes of lenders, including the usual banks we most often deal with. The Treasurer has noted that the changes will “restore balance to the system after 10 years of regulatory creep that has seen the pendulum swing too far away from borrower beware to lender beware”.
What does this mean for borrowers you ask?
Most importantly, the Treasurer is signalling that provided lenders and finance brokers act in the best interests of their clients and make reasonable enquiries it will ultimately fall to the borrower to take responsibility for their actions.
If the borrower has four kids in private school and a 100ft yacht but states that if need be, the kids can slum it at public school and the yacht will go, then it becomes the responsibility of the borrower to take those actions.
Ground-breaking stuff to be sure. Imagine a legislative system where the individual takes responsibility for their actions with limited scope to cry foul when things don’t go to plan. Might be the new normal, although I hold limited hope.
In closing, a few observations...
While we have a cohort of potential borrowers who do not enjoy a strong grasp of financial principals there will always be a place in our society for consumer protection. The sad fact is that our business spends more time on financial education and counselling than actual finance broking. We have a generational challenge to better educate borrowers to a point where they simply do not need protecting. In the interim the impartial, non-aligned position occupied by finance brokers will continue to be a favoured channel for borrowers.
It is important to appreciate that the NCCP Act relates to personal borrowers and is mostly aimed at private parties borrowing to purchase a residential property. Having said that I think it is fair to say that much of the legislation’s content has crept into bank business and commercial finance credit policies.
Lastly, and to no great surprise consumer protection advocates have not exactly applauded the treasurer’s announcement. It seems they would prefer that we all be protected, whether we like it or not.
This strikes me as akin to the premise that we should all walk as slow as our slowest person.
Not exactly a recipe for excellence in challenging times. Here is a thought... frame the legislation and regulations with an opt out clause and let me be completely responsible for my decisions. Yep, you are right… would never happen in modern Oz.